The Central Bank of the United States (US) Federal Reserve again raised its benchmark interest rate for the second time. The Fed raised interest rates by 75 basis points, or three-quarters of a point.
The benchmark interest rate hike has occurred twice in a row in the near future. By the end of this month's Fed meeting, members of the US central bank had agreed to raise interest rates by three-quarters of a percentage point.
Central bank members voted unanimously for this extreme measure. All members of the central bank support aggressive steps to tackle inflation by raising interest rates.
"Inflation is still rising, reflecting the supply and demand imbalance related to the pandemic. Higher food and energy prices, and broader price pressures," the Fed said in a statement.
This extreme action of the central bank is called unprecedented. It emphasizes how far the Fed is willing to push the economy to ease rising costs for Americans amid the highest inflation rate since the 1980s.
"Expenditure and production indicators have recently weakened. However, employment gains have been quite strong in recent months, and the unemployment rate remains low," the Fed said.
In previous months, America's central bank noted an increase in energy prices. This month, the Fed was the first to include rising food costs in their analysis.
When the COVID-19 pandemic first hit the United States, the Fed launched a series of emergency measures to support the US economy. Including cutting interest rates to 0% so you are almost free to borrow money.
However, it turns out that the Easy Money policy actually encourages household and business spending. Now this is fueling inflation and contributing to the current overheated economy.
Now the US economy no longer needs the support of the Fed. America's central bank has taken steps to slow the economy by raising interest rates.
The Fed's action will increase the interest rates that banks charge each other for loans to a range between 2.25% and 2.50%, the highest since December 2018.
Over the past three decades, the Fed has pushed benchmark interest rates up or down on average. 25 basis points average. Central banks prefer to steer the economy at a slow pace. But a spike in inflation forced the central bank last month to implement a threefold rate hike.
The last rate hike was the first time in the history of the modern Fed. The central bank raised interest rates by 75 basis points for the second time in a row.
The Fed will have to strike a delicate balancing act or its strategy could slow economic growth while inflation is still growing. Significant and entrenched inflation could lead to a loss of confidence if the Fed can fulfill its dual mandate of price stability and maximum employment.
The biggest risk to the economy is persistent inflation, not an economic downturn. In the last 11 tightening cycles, the Fed has only managed to avoid recession three times. In each of these cycles, inflation was lower than it is today. That made some analysts and market participants nervous.
However, investors widely expect the Fed to raise its benchmark interest rate by another three-quarters of a point after the June inflation report. US consumer prices soared to new pandemic-era peaks in June, surging 9.1% year over year, according to the latest data from the Bureau of Labor Statistics.
New data from the Bureau of Economic Analysis shows Americans are saving far less than they did last year. In May, Americans saved just 5.4% of personal income, down from 12.4% year-on-year.
The unemployment rate, meanwhile, is near its lowest level in 50 years and has declined this year. A persistently strong labor market gives the Fed some leeway in its interest rate maneuvers.